The announcement by the Nigerian National Petroleum Company Limited (NNPCL) on August 16, 2023 that it had secured a $3 billion emergency crude repayment loan from the African Export-Import (AFREXIM) bank to stabilise the naira, has generated mixed reactions.
While some experts commend the deal as a good quick fix, others express concern that the NNPC should focus on fixing the refineries and fighting the intractable oil theft which are root causes of the weak naira, instead of borrowing to lend to the Central Bank of Nigeria (CBN).
Analysts at Cordros Securities, an investment and advisory firm, described the deal as a pleasant surprise. They commended the NNPCL for the initiative and said it would address the urgent forex crisis, at least in the short term while efforts are made to put the economy in a stable state.
“While we have held a standing view that Nigeria needs significant FX inflows to provide a near term support for the FX reforms the CBN embarked on since 14 June, the NNPCL’s loan arrangement came as a positive surprise to us as it was not among our expected short-term fixes.
“Consequently, we think this loan is a favourable short-term fix in providing near-term FX supply to support the FX market and stabilise the local currency,” the firm said in a note to its clients.
The Afreximbank deal squares with the position of Agora Policy, an Abuja-based think-tank which said in its report, “Steadying Nigeria’s Fledgling Foreign Exchange Reform” published on Monday, that Nigeria needs a big stash of dollars and fast to provide liquidity in the economy.
“A look at the fundamental data reveals the existence of large imbalances in Nigeria’s external accounts occasioned by a mix of structural shifts and policy missteps by the CBN as the bane of the present FX woes,” the Agora policy report said.
It said mere forex adjustments to adapt to reality may lead to short-lived gains, followed by a return to previous practices.
To address the present challenge, the think tank said policymakers must look to strike the iron while it is hot to avoid reform fatigue by seeking out sources of large dollar liquidity on concessional terms.
Although THEWILL could not reach Agora Policy after the NNPCL’s announcement of the Afreximbank deal, the think-tank had said solution to the present forex crisis can be achieved “by exploring the option of a standby arrangement from multilateral agencies of significant scale ($5-10 billion) with the objective of acquiring credibility.”
“Having front-loaded fiscal consolidation and external sector adjustments, Nigeria has the credibility to embark on key partnerships to catalyse increased capital flows.”
While this is politically tricky, the think-tank explained that desperate times call for bold and desperate measures. It said the global geopolitical environment means Nigeria has a window to obtain this funding if it is ready to push the envelope.
Uche Uwaleke, Professor of Capital Market at the Nasarawa State University, Keffi, said the $3 billion deal had huge implications that should not be overlooked, and that NNPC ought to have considered a better alternative such as using the nation’s reserves because of the impact of the loan on the government revenue.
“Much as intervention in the Forex market by the CBN is desirable, a more cost-effective option would have been to use what is left of our external reserves as opposed to taking a loan from Afreximbank or even the IMF.
“The fact that the $3 billion loan was taken by NNPCL, a company still owned 100 per cent by the Federal government with the Ministries of Finance and Petroleum Resources holding 50 per cent share each, makes it more worrisome.
“By implication, the Federal government that is already saddled with huge debt is borrowing to lend to the CBN, when it should have been the other way round. “Ultimately, this new loan contracted by the NNPCL adds to the growing public debt and may have been contracted at non concessionary terms being an emergency loan.
“It’s important that Nigerians, especially the National Assembly, are informed about the terms of the loan and the collateral security involved.
“Without doubt, this $3 billion loan on the balance sheet of NNPCL will make the company less attractive and possibly jeopardize the ongoing plan to private the company by listing it on the Nigerian Exchange.” Uwaleke told THEWILL in a note.
The Managing Director/CEO, Taurus Oil & Gas Limited, Dr Nnaemeka Obiaraeri, said the foreign exchange market shares the same dynamics and fundamentals as any other two-way market. The finance and banking expert also emphasised that without productivity that generates goods and services to export and earn foreign exchange, any other means amount to “playing cosmetic games”.
“The Fx market, just like any market, is driven by the common law of demand and supply. If your global monthly dollar demand (real sector demand and corruption driven demand) is $8 billion, you must look at veritable and sustainable sources of generating dollar supply of at least $20 billion into your economy on a monthly basis. Anything outside this, is just playing cosmetic games.
“What is the singular reason why the UAE Dirham and Singaporean Dollar have remained very stable in exchange parity to the US Dollar over the last 15 years? It is the same fundamental principles at play,” Obiareri told this newspaper in a note.
The announcement by NNPCL caught most Nigerians unawares. It also sounded like one triggered by intuitive exhilaration over a spectacular feat. Coming at a time Nigeria seems to be at her wit’s end over the depreciating naira, the development caught the attention of many.
According to the NNPCL, the loan agreement is not a crude-for-refined product swap but an upfront cash loan against proceeds from a limited amount of future crude oil production. The loan arrangement means that the NNPCL is collecting its future revenue from crude oil production in advance from the Afreximbank to hold the Naira from falling further.
The disbursement will be in tranches depending on the Federal Government’s specific needs and requirements and there are no sovereign guarantees tied to the loan which means it will not be added to the existing government debt stock.
When the money comes to the NNPCL, it will enable the corporation to settle its taxes and royalties to the FGN in advance, providing the CBN with US dollar liquidity needed to provide near-term respite for the local currency. In terms of repayment, the NNPCL will repay the loan from its future crude oil production, depending on the terms of the agreement with AFREXIM.
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
